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MIT14 126S16 Globalgames

The document discusses the concept of Global Games in game theory, highlighting the existence of multiple equilibria in settings with strategic complementarities and how introducing incomplete information can lead to a unique equilibrium prediction. It covers various scenarios including investment decisions and risk dominance, along with the mathematical modeling of players' beliefs and payoffs. The document also references the work of Carlsson & van Damme and provides insights into Bayesian Nash Equilibria and monotone supermodular games.

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5 views23 pages

MIT14 126S16 Globalgames

The document discusses the concept of Global Games in game theory, highlighting the existence of multiple equilibria in settings with strategic complementarities and how introducing incomplete information can lead to a unique equilibrium prediction. It covers various scenarios including investment decisions and risk dominance, along with the mathematical modeling of players' beliefs and payoffs. The document also references the work of Carlsson & van Damme and provides insights into Bayesian Nash Equilibria and monotone supermodular games.

Uploaded by

maggiechu215
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Global Games

14.126 Game Theory


Muhamet Yildiz

1
Motivation

„ Multiple equilibria exist in settings with


strategic complementarities
‰ Investment/Development
‰ Search
‰ Bank runs
‰ Currency attacks
„ Global Games: introducing a certain type of
incomplete information leads to a unique
equilibrium prediction.

2
A partnership game

Invest Not-Invest

Invest TT T

Not-Invest T 

3
T is common knowledge

T<0
Invest Not-Invest

Invest TT
TT T
T


Not-Invest T
T 

4
T is common knowledge

T>1
Invest NotInvest

Invest TT T
T


NotInvest T
T 


5
T is common knowledge

T < 1 Multiple Equilibria


Invest Not-Invest

Invest TT T

Not-Invest T 

6
T is common knowledge

Not-Invest Invest
Multiple
Equilibria

T

7
T is not common knowledge

„ T is uniformly distributed over a large interval


„ Each player i gets a signal
xi = T + HKi
‰ (K1, K2) is bounded
‰ Independent of T
‰ iid with continuous F (common knowledge)
‰ E[Ki] = 0

8
Recall: Monotone supermodular games
„ G = (N,T,A,u,p)
„ T = T0 u T1 u … u Tn (Ž RM)
„ Ai compact sublattice of RK
„ ui : A u T 
‰ ui(a,.): T   
‰ ui(. ,t): A     supermodular in ai,
has increasing differences in a and in (ai,t)
„ p(.|ti) is increasing function of ti—in the sense of 1st-order
stochastic dominance (e.g. p is affiliated).
„ Theorem: There exist BNE s* and s** such that
‰ For each BNE s, s* t s t s**.

‰ Both s* and s** are isotone.

9
Conditional Beliefs given xi
T d xi – HKi
„ i.e. Pr(TTc_xi) = 1-F((xi-Tc)/H):=G(Tc_xi)
xj d xi + H Kj-Ki)
„ Pr(xjxjc_xi) = Pr(H(Kj – Ki) xjc – xi)
„ Pr(T Tcxj  xjc_xi) =
 1{T Tc} ((xjc  T)/)( | ) decreasing in xi
because integrand decreasing in T and G(˜_xi)
FOSD G(˜_xic) whenever xi xic
„ cE[T|x ] = x
i i

10
Payoffs

„ Invest > Not-Invest


Invest Not-Inv
„ Ui(ai,aj,Tx) is
Invest T T -1 supermodular.
„ Monotone supermodular
Not-Inv 0 0
„ There exist greatest and
smallest rationalizable
strategies, which are
‰ Bayesian Nash Equilibria
‰ Monotone (isotone)

11
Monotone BNE

„ Best response
Invest iff xi t Pr(sj = Not-Invest|xi)
„ Assume supp(T) = [a,b] where a < 0 < 1 < b.
„ xi < 0 Ÿ si(xi) = Not Invest
„ xi > 1 Ÿ si(xi) = Invest
„ A cutoff xi* s.t.
‰ xi < xi* Ÿ si(xi) = Not Invest; xi > xi* Ÿ si(xi) = Invest
„ Symmetry: x1* = x2* = x*
„ x* = Pr(sj = Not-Invest|x*) = Pr(xj < x*|xi=x*) = 1/2
„ “Unique” BNE

12
Questions

„ What is the smallest BNE?


„ What is the largest BNE?
„ Which strategies are rationalizable?
„ Compute directly.

13
T is not common knowledge
but the noise is very small
It is very likely that

Not-Invest
Invest

T
1/2

14
Risk-dominance
„ In a 2 x 2 symmetric game, a strategy is said to be
“risk dominant” iff it is a best reply when the other
player plays each strategy with equal probabilities.
Invest Not-Invest

Invest TT T Invest is RD iff


T T !
Ù T!
Not-Invest T 

Players play according to risk dominance

15
Carlsson & van Damme

16
Risk Dominance
A B „ Suppose that (A,A) and
(B,B) are NE.
A u11,v11 u12,v12 „ (A,A) is risk dominant if
(u11-u21)(v11-v12)
B u21,v21 u22,v22 ¾ (u22-u12) (v22-v21)

¾ Affine transformation: g1a...


A B
„ (A,A) risk dominant if
A g1a, g2a 0,0 g1a g2a > g1b g2b
„ i is indifferent against sj;
B 0,0 g1b, g2b (A,A) risk dominant if
s1 + s2 < 1

17
Dominance, risk-dominance regions

„ Dominance region
Dia ={(u,v)| gia>0, gib<0}
„ Risk-dominance region

Ra ={(u,v)| g1a>0,g2a>0; g1b, g2b>0 Ÿ s1 + s2 < 1}

18
Model

„ 4Ž Rm is open; (u,v) are continuously differentiable


functions of T w/ bounded derivatives;
„ prior on T has a density h which is strictly positive,
continuously differentiable, bounded.
„ Each player i observes a signal
xi = T + HKi
‰ (K1, K2) is bounded,
‰ Independent of T,
‰ Admits a continuous density

19
Theorem

„ Suppose that
‰ x is on a continuous curve C Ž 4
‰ (u(c),v(c))  Ra for each cC
‰ (u(c),v(c))  Da for some cC.
„ Then A is the only rationalizable action at x
when H is small.

20
“Public” Information
„ T ~ N(y,W2) and HKi ~ N(0,V2)
„ Given xi,
T ~ N(rxi+(1-r)y, V2r)
xj ~ N(rxi+(1-r)y, V2(r+1))
r = W2/(V2+W2)
„ (Monotone supermodularity) monotone symmetric NE w/cutoff xc:
§ (1  r )(x c  y ) ·
rx c  (1  r )y Pr(x j d x c | x i xc ) )¨¨ ¸¸
© V r 1 ¹
„ Unique monotone NE (and rationalizable strategy) if

rx c  (1  r )y  Pr(x j d x c | x i xc )
is increasing in xc whenever zero, i.e.,
V < 2SW4(r+1)

21
Courtesy of Stephen Morris and Hyun Song Shin. Used with permission.

22
MIT OpenCourseWare
https://ocw.mit.edu

14.126 Game Theory


Spring 2016

For information about citing these materials or our Terms of Use, visit: https://ocw.mit.edu/terms.

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